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Why Facebook Is Killing It—Even When Nobody Else Is

Facebook founder and CEO Mark Zuckerberg at the annual Mobile World Congress in Barcelona, Spain on February 21, 2016.

David Ramos/Getty Images

Facebook is killing it.

As its biggestrivalsstumble, Facebook wildly beat Wall Street’s expectations when it released its earnings yesterday. The company said that it now reaches more than a billion people every day and 1.65 billion people every month. Profits for the first three months of the year tripled compared to the same time last year to $1.5 billion on $5.3 billion in revenue. In response, Facebook's stock hit an all-time high this morning.

The tech sector is facing a lot of uncertainty right now, especially with some of its biggest companies, says Scott Kessler, the deputy global director for equity research at S&P Global Market Intelligence. "Facebook, which has relatively quickly emerged as one of the biggest technology companies on the planet, delivered more significantly and consistently than all those others and than people expected,” he says.

Throughout Facebook's evolution, one constant has remained, and he wears a hoodie.

Facebook's success is all the more surprising considering that, well, it's a complicated company. Like Alphabet, it spends money on moonshot ventures like drones. Like Apple, it depends heavily on a legacy product (ahem, News Feed). And there’s no guarantee that the much-hyped Oculus Rift will be a huge hit among most consumers this year.

But throughout Facebook's evolution, one constant has remained, and he wears a hoodie. Along with Facebook's earnings yesterday, CEO Mark Zuckerberg revealed a plan to restructure the company's stock offering. In short, Zuckerberg wants to be able to give away his Facebook shares without giving up control of the company. That may sound like a power grab, and it is. But if you're a Facebook shareholder, your only response should be: more power to him.

The Not-So-Secret Weapon

How did this happen? Certainly Facebook knows how to serve up products that more and more people like. And it knows how to make a whole lot of money from them. While other companies like Twitter and Google have struggled with mobile advertising, Facebook has skillfully transitioned its customers to buying ads where most users are likely to see them: on their phones.

More holistically, Facebook has been very good at staying one step ahead. The company has made a series of smart decisions in the past few years that are now beginning to pay off. Along with its mobile ads, Facebook has started to prioritize video (and, with it, video ads). Seen as questionable moves at the time, it acquired Instagram and WhatsApp based on the seemingly correct hunch that people are likely to spend some of their online time outside of Facebook itself sharing photos and sending messages. And its purchase of Oculus puts Facebook in a great position to command attention in what could be the future's next defining medium.

Facebook has an aggressive vision of what the future looks like—and it’s constantly testing, iterating, and exploring its vision. It should come as little surprise then that it was Facebook, not Apple or Alphabet, that earlier this month laid out its ten year roadmap. All of which is a strategy that ultimately stems from Zuckerberg's own sensibility.

A Class of Its Own

And Zuckerberg has been able to infuse the company with that sensibility because he's not only the CEO but also the controlling shareholder. Last year, Zuckerberg and his wife, Priscilla Chan, said that they planned to give away most of those shares—tens of billions of dollars-worth—through their foundation in their own lifetimes. That generosity would seem to threaten Zuckerberg's ability to keep control of his company, which is apparently why yesterday Facebook is proposing to create a new class of non-voting shares.

These so-called Class C shares would allow the company to issue more stock without diluting Zuckerberg's voting power. (There are also "Class A" shares, which each get one vote, and "Class B" shares, many of which Zuckerberg owns, which each get 10 votes.) This is similar to what Google parent company Alphabet has done to allow its founders to retain power at their own company. And it's important for Facebook because the company needs to be able to issue new shares, whether as employee compensation or a means to acquire new companies, says Santa Clara University School of Law corporate finance professor Stephen Diamond.

'He’s perceived as, and thought of as, literally one of the best CEOs in the world, bar none.'

Scott Kessler

"I’ll be able to keep founder control of Facebook so we can continue to build for the long term, and Priscilla and I will be able to give our money to fund important work sooner," Zuckerberg said of the board's proposal, if it's approved. And that's likely to happen because, oh right, Zuckerberg already controls the company.

All of which shows the incredible power that both Facebook and Zuckerberg have. Zuckerberg has made his case to shareholders that his vision of the future has led Facebook to make risky moves, like buying Instagram and WhatsApp, that has ultimately helped the company in the long run. By staying in control, he argues, he'll be able to continue to make these kinds of risky decisions. “He’s perceived as, and thought of as, literally one of the best CEOs in the world, bar none," Kessler says.

Not that everyone will be happy. “There are lots of companies that are run with one class series of stock that buy other companies and take risky moves, like Microsoft, IBM, and Apple,” Diamond says, adding that institutional investors want to invest in companies where they believe their voice as shareholders matters. “When you’re using other people’s money and the public market to raise funds for your company, you have to balance accountability and transparency,” he adds.

But for now, Facebook is killing it. As its soaring stock shows, investors are thrilled. So it stands to reason that, even if Zuckerberg wants to let go of his Facebook stock, shareholders might not want him to let go of Facebook anytime soon.